The Best Peak Oil Investments, Part VI: Barriers to Substitution

Tom Konrad CFA

There are two types of solution to
the liquid fuels scarcity caused by stagnating (and eventually falling)
oil supplies combined with growing demand in emerging economies.
The most obvious is to find a substitute to replace oil. These
substitute have barriers to their use as a replacment petroleum based
fuel.
Understanding those barriers also leads us to the investment
opportunities that arise from these substitutes. As I wrote the first five parts of this
series, looking into
potential substitutes for gasoline and diesel, it was clear that many
potential substitutes would need to overcome barriers to its
adoption. This article and the next will look at these barriers,
and what they say about the potential
for investments in substitutes for liquid fuels from petroleum.
Part VII will look at factors which constrain the supply
of these substitutes. Part VIII will combine the resulting
understanding of these barriers and constraints to highlight the
investment opportunities arising from them.

Barrier: Infrastructure

One great advantage gasoline and diesel have over most of the proposed
alternatives is an extensive infrastructure. In addition to an
extensive pipeline network, we also have a large number of competing
fueling stations. If a new fuel requires new fueling stations,
like natural gas and hydrogen, or charging points and (potentially)
battery swapping stations (electricity) it may not be enough to make
sure that enough filling stations exist for would-be drivers to make
long trips. If there is only one national network of filling
stations, drivers will likely become concerned that the lack of
competition will mean that they overpay for fuel.

In terms of having a nationwide transportation network, the best placed
substitutes are
natural gas and electricity.
In
terms
of
point
of sale delivery, electricity has an advantage in
that it's safe and relatively cheap to place charging infrastructure in
parking lots, and most homes already have the capability of charging an
electric vehicle, although it takes a long time from the 120V outlets
in most garages. Most homes do not have natural gas in the
garage, and even when they do, a compressor is necessary.

Conventional biodiesel and ethanol can be dispensed from the same pumps
used for fossil fuels, but both present some difficulties in transport
and storage. Biodiesel cannot be allowed to get too cold, because
it begins to congeal, so in colder climates, storage tanks as well as
transport tankers must be insulated and even heated. Ethanol
cannot be shipped through pipelines that are also used for gasoline,
because it absorbs too much water. Hence ethanol and biodiesel
are mostly shipped in tanker trucks and rail cars. But both can
be blended with conventional fuels, meaning that little new dispensing
infrastructure is needed. The importance of a competitive fueling
infrastructure can be seen in in this November
2009
statement
from the Trucking industry to the US Senate [pdf]
about the conversion of trucking from diesel to natural gas. They
say,

It is not sufficient to have a single
LNG vendor with stations built at strategic locations along key freight
corridors. Absent a competitive refueling infrastructure, trucking
companies could face unreasonably high prices at individual retail LNG
stations that have no competition in a particular geographic area.
While competition exists in the natural gas industry, the high barriers
to entry for retail LNG refueling stations may slow the development of
a competitive refueling infrastructure. A competitive LNG refueling
model would require the presence of multiple entities selling LNG in
the same geographic area.

This objection applies to any potential alternative vehicle which locks
the user into one fuel, and includes Electric Vehicles (EVs) such as
the Nissan Leaf and Hydrogen Fuel Cell Vehicles, but not to flex fuel
vehicles (E85 ethanol) or biodiesel (which can be used in any diesel
engine.) It also does not apply to Plug-in Hybrid Electric
vehicles, such as the Chevy Volt, because while charging points and
battery swapping stations may be limited, the existing fueling
infrastructure provides supply competition.

The fuel with the weakest infrastructure is hydrogen. Like
natural gas, it needs
specialized filling stations, but hydrogen lacks a national
pipeline network.

Incomplete infrastructure can be either a barrier or an
opportunity. If a potential fuel is compelling for other reasons,
firms well placed to provide the necessary infrastructure should be
able to profit handsomely. If, on the other hand, a fuel lacks an
existing infrastructure and also faces significant other barriers, it
will be unlikely to become a significant
transportation fuel, and infrastructure investors are likely to lose
their shirts along with everyone else interested in the fuel.

Barriers: Energy Density

When talking about energy density, it's important to consider not only
the fuel, but the tank. Both volume and weight are
important.
Few fuels are as energy-dense as gasoline and diesel, both of which can
be stored in simple, unpressurized fuel tanks. In contrast, the
fuel tank for electric vehicles is the battery, and batteries are not
only large and heavy for the amount of energy they store, they are also
extremely expensive and degrade over time. Although the cost of
driving an electric vehicle are very low compared to gas or diesel, the
large up-front investment in batteries makes the total cost of owning
an eelctric vehicle higher except for drivers who use the vehicle for
frequent, short trips with time to recharge in between.

The big winners for energy density are synthetic
fuels, as well as conventional
biofuels
such
as
ethanol
and biodiesel. Although ethanol has
been criticized because it only contains about 2/3 of the energy of the
same volume of gasoline, it's close enough that people using
ethanol don't have to completely change their behavior in order to use
it in a conventional vehicle. In contrast, electric vehicle
manufacturers find that the range of their vehicles is constrained not
only by the cost of batteries, but also by their size and weight.
Weight is particularly important, because as a vehicle gets heavier,
more of the energy is used to move the vehicle rather than the
occupants, which in turn requires even more batteries.

In between energy-dense biofuels and bulky batteries lie gaseous fuels:
natural gas and hydrogen, which have good energy per gram, but require
heavy pressurized tanks to pack them into a space small enough to fit
in
a vehicle. Hydrogen requires a pressurized tank
that takes up a lot of space, even if it is not very heavy.
Natural gas can either be used as Compressed natural gas (CNG) or
Liquid Natural Gas (LNG.) CNG is similar to hydrogen, although it
is a little more energy dense. LNG has the same energy density as
diesel, but requires considerable energy to compress into that form,
and is not available from a home fueling station. Hence, natural
gas vehicles present a tradeoff between energy density and fueling
infrastructure.

Conclusion

Considering just the barriers of energy density and infrastructure, it
is clear why the conventional biofuels ethanol and biodiesel gained an
early lead over alternatives such as electricity and hydrogen.
The big questions about biofuels arise from constraints in their total
supply, and the harm that many forms of biofuel agriculture do to the
environment. Synthetic
fuels
made
from natural gas and coal (GTL and CTL) can also have
excellent energy density and can take advantage of existing
infrastructure and vehicle fleets, but so far have not been adopted in
a large way becasue they have had to compete with cheap oil. As
oil prices rise, we will probably also see the rise of synthetic fuels,
but, like biofuels, their long term prospects will be limited by total
supply and possibly by concern about the environmental harm they
do.

Such supply constraints and environmental concerns will be the subject
of Part VII. Previous articles have been:

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Comments

You mentioned that "Most homes do not have natural gas in the garage, and even when they do, a compressor is necessary."
First: Refueling with natural gas in an enclosed space like a garage would be very risky -- any leak could cause an explosion. This should be done outside in the open air. A carport covering would probaly be OK.
Second: A compressor may not be necessary if the refueling system were properly hooked up. The gas in the line from the utility company is under very high pressure up to our house. Just outside our house the gas goes through a regulator which reduces the pressure to a very low psi (pounds per square inch) so there is very little danger of gas leakage in the house. The outside gas line, where the pressure is high, is where the refueling line should be attached. Then a compressor would not be need. But this would need the cooperation of the utility company, which would probably require a fee.

The long term prospects regarding natural gas may not be limited by total supply and environmental harm.
Of the two sources of natural gas -- fossil and sustainable, the author's concerns are applicable to fossil fuels, not natural gas from sustainable sources.
Haubenschild Farms, Inc., a family-owned farm near Princeton, Minnesota, produces methane from the manure of a herd of dairy cows for the following reasons: Odour control, Generation of electricity, Thermal energy production, Potential increase in the value of manure as fertilizer, Pathogen reduction, Weed-seed destruction, and Possible sale of digested fibres.
As for global warming, it should be noted that methane is about twenty three times worse as a green house gas than carbon dioxide.
So, capturing and utilizing natural gas (methane) should reduce environmental harm, and lessen global warming.

The long term prospects of natural gas from sustainable sources look very good.
However, currently, of the few farmers who capture natural gas, they get it only from the manure. Note: MOST of the gas is released from the animal's mouth. So, someday, wise farmers will place the cattle in tents to capture the gas. Natural gas is lighter than air, so it rises. A large plastic pipe could run from inside the top of the tent down and out to where it could be used.

Even the president of the United States, George W. Bush, made a fervent appeal to the developed world to take to methane farming -- see Times of India (Dec 08, 2004). He rightly said methane farming would counter the skyrocketing prices of crude oil and emerge as an alternative to fossil fuels.

Arnold,
Interesting thoughts on how NGV filling might work. Do you know how pipeline pressures compare with the tank pressures in CNG vehicles?

Regarding the untapped potential of biomethane, I agree that there is a lot of it, and not only agricultural methane, but also landfill methane and methane from sewage treatment. However, the total potential of such biomethane is small compared to our current natural gas usage, and it competes directly the use of that natural gas in electricity generation (which often requires much less gas cleanup than making biomethane pipeline quality.

estimates the technically feasible biomethane potential in CA at 23 Billion cu ft/year, with 14 Billion of that from dairy waste. In 2008, CA consumed 2450 Billion cubic feet of natural gas, meaning that biomethane potential is less than 1% of demand, meaning that it's not going to make a significant difference in the overall natural gas market.

Biomethane potential might be higher in intensive dairy states that are less reliant than CA on natural gas for electricity generation, but probably not more than 10% at the most.

Natural gas transmission lines generally operate at around 1500 psi. Usually, the distribution line pressures are much lower, 1000 psi or less. The pressure feeding into a home is dramatically lower, from 60 to less than 1 psi.

Gas pressure in vehicle storage tanks is typically above 3000 psi and, in some cases on the order of 5000+ psi.

You mention ethanol and biodiesel as the two alternative liquid fuels. Certainly these are the two most prominent. However, there are others that reduce or eliminate some of the issues yo discuss. For example, biobutanol has an energy density nearly equivalent to gasoline. And, green diesel, not to be confused with biodiesel, is much less susceptible to congealing due to cold.

While infrastructure is an issue, its import is probably overplayed. For example, the appropriate use of natural gas for vehicular fuel is for local and regional fleets such as "garbage" trucks, buses and regional delivery trucks such as for groceries, Walmart, etc. If conversion to natural gas was focused on these vehicles, infrastructure changes would largely entail adding natural gas fuel capabilities at their central fueling depots.

While such a change would have a more limited effect in reducing oil consumption, it would still have a considerable effect. And it would do so at a much lower cost.

Alegra,
I don't think the energy density of ethanol is a significant problem; I think people are making too big a deal about that. The biggest infrastructure barrier for ethanol is the inability to put it in the existing pipeline infrastructure.

I agree that next gen biofuels such as biobutanol, DME, green diesel, biocrude, and other variants have the potential to overcome the infrastructure barriers for biofuels, but I don't know which will do the trick, and the biggest problems for biofuels are not barriers, but the constraints I discuss in part VII.